Edited version of private ruling

Authorisation Number: 1011753440055

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Ruling

Subject: Endowment warrants

Question and Answer:

Is any gain made on the endowment warrants not completed assessable as a capital gain?

Yes

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You purchased a parcel of portfolio endowment warrants after 20 September 1985 over a 12 month period, one parcel per month.

In the first month, you acquired a certain number of warrants which cost $a per warrant. In the second month, you acquired another parcel of warrants costing $b per warrant. Over a total period of 12 months, you subsequently acquired several parcels of warrants

The portfolio of shares underlying the portfolio endowment warrants consisted of shares in several companies.

You purchased a total of x warrants (units).

Your warrants continued to trade on the ASX until date A which was the completion date.

Based on your holding of x warrants, the maximum number of warrants you could exercise was y thousand. You were permitted to exercise multiples of 1000 warrants.

You elected to complete your portfolio endowment warrants by lodging a valid Completion Notice together with a final payment of $m. In so doing, you acquired y portfolios of shares.

You were entitled to receive a payment for the remaining z warrants that were required to be lapsed as they were not in a multiple of 1,000 units. You were also entitled to a payment for the value of any fractional shares.

The total value of the shares not delivered to you was $p. These shares related to the z warrants which were not completed. You received a payment of $r calculated as follows:

Total value of shares sold $p

Less final payment $q

Net payment to investor $r

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Subsection 104-25(1).

Income Tax Assessment Act 1997 Subsection 104-25(3).

Income Tax Assessment Act 1997 Section 108-5.

Income Tax Assessment Act 1997 Section 109-5.

Income Tax Assessment Act 1997 Section 110-25.

Income Tax Assessment Act 1997 Section 115-5.

Income Tax Assessment Act 1997 Section 134-1.

Reasons for Decision

A capital gains tax (CGT) asset is any kind of property or a legal or equitable right that is not property (section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997)).

A warrant provides you with the right to acquire shares or the cash value of the warrant. As you have a legally enforceable right but no ownership of tangible assets, the right is considered to be a CGT asset.

A capital gain or capital loss can only be made if there is a CGT event. There are CGT consequences when a warrant is sold, it expires or is exercised.

Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if ownership of an intangible CGT asset ends by the asset expiring or by its being redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited.

When a warrant expires you make a capital gain if any amount received is more than the warrants cost base and will make a capital loss if any amount received for the expiry is less than the warrants reduced cost base (subsection 104-25(3) of the ITAA 1997).

As a general rule, when a warrant is exercised and you acquire the underlying shares CGT event C2 occurs however subsection 134-1(4) of the ITAA 1997 directs that any capital gain or loss will be disregarded. However, a CGT event is triggered where you receive a payment for shares sold.

Your case

You purchased a parcel of portfolio endowment warrants in over a 12 month period (1 parcel/month). You purchased a total of x warrants (units).

Your warrants continued to trade on the ASX until date A which was the completion date.

You provided a valid Completion Notice in respect of y thousand endowment warrants. You thus became the registered holder of y portfolios of shares. As your Completion Notice specified a number of warrants which was not a multiple of 1,000, the number of endowments deemed to be specified in your Completion Notice was rounded to the nearest 1,000. You were entitled to a payment for the z warrants not completed.

The total value of the shares not delivered to you was $p. The shares were sold. These shares related to the z warrants which were not completed. You received a payment of $r calculated as follows:

Total value of shares sold $p

Less final payment $q

Net payment to investor $r

How to calculate you capital gain

A capital gain is made when the capital proceeds of an asset exceed the asset's cost base. In this case the asset in question is endowment warrants not completed.

Capital proceeds

The capital proceeds are $p as this is the amount for which the shares (being the underlying asset of the z warrants) were sold.

Cost base

The cost base of a CGT asset is made up of five elements:

1. money or property given for the asset

2. incidental costs of acquiring the CGT asset or that relate to the CGT event

3. costs of owning the asset

4.   capital costs to increase or preserve the value of your asset or to install or move it

5. capital costs of preserving or defending your ownership of or rights to your asset.

You need to work out the amount for each element and then add them together to work out the cost base of your CGT asset.

Reduced cost base

When a CGT event happens to a CGT asset and you have not made a capital gain, you need the asset's reduced cost base to determine whether you have made a capital loss.

The reduced cost base is made up of the same five elements as your cost base, except the third element.

Your case 

In order to work out your cost base of the z warrants not completed, you will first need to calculate the first element of the cost base of these warrants.

You purchased your portfolio endowment warrants over a 12 month period (1 parcel/month). In the first month, you acquired a certain number of warrants which cost $a per warrant. In the second month, you acquired another parcel of warrants costing $b per warrant. You subsequently acquired several parcels of warrants, each with a different cost per warrant, in other words, each parcel had a different cost, known as the first element of the cost base.

You can choose which of the warrants you wish to be treated as the z endowment warrants which were not completed. All the warrants do not need to be from the same parcel of warrants.

The final payment of $q is also included in the cost base of your warrants.

You will make a capital gain if your capital proceeds are greater than your cost base.

Discount capital gains

You can use the discount method to calculate your capital gain if:

· · you are an individual;

· · a CGT event happens to an asset you own;

· · the CGT event happened after 21 September 1999;

· · you acquired the asset at least 12 months before the CGT event; and

· · you did not choose the indexation method.